The Energy Policy and Conservation Act of 1975 required a Strategic Petroleum Reserve (SPR) to contain at least 150 million barrels by December 1978 and 500 million by 1982. In 1977, President Carter accelerated the program, to acquire 500 million by 1980 and a billion by 1985.
By early 1979, only 90 million barrels had been stored. In April 1980, the president destroyed the SPR. He does not put it that way, of course. But buying, which was suspended in November 1978, will not resume until July 1981, and then at the rate of 36 million barrels per year. In 27 years, we would have our billion barrels.
Why this radical shift? Buying was suspended, ostensibly, because the market was tight. The market has for months been loose, but still no buying. The real reason, then and now, is that Saudi Abria and partners hate consumer stockpiles. In early March, the London Economists noted the "spectacle" of Secretary Duncan flying to Riyadh to seek royal assent to resume SPR purchases. In fact, it is now clear that there was an agreement in November 1978 to suspend buying. We will see in a moment what we got in return.
The reaction in Congress and the press has been mild and fitful. Clearly, the reasons for a stockpile are not understood.
People accumulate inventories of anything whose receipt or use is uncertain and fluctuating. Joseph built a grain stockpile for the seven lean years to come. We accumulate reserves of money to pay the cost of sickness, fires, etc.
The SPR would be insurance against suddenly decreased oil production, anywhere. The world oil market is one big pool. A cutback anywhere means a shortage everywhere, regardless of any particular country's suppliers. The 1973-74 Arab "boycott" of the United States was a sham, but the cutback was painfully real. By 1990, most of our oil imports may come from Mexico, but that helps security not a bit. A Middle East cutback would divert Mexican exports to Europe and Asia, evening out the shortage and spreading the higher prices.
A sudden cut, and panic in the oil markets, is an ever-present danger. There could be another use of the Arab "oil weapon." Even a wider Mideast peace means prolonged tension over interpreting and carrying out this or that provision. The Israelis will use whatever means of pressure they have; so will the Arabs.
More important, practically every oilproducing country has a weak undemocratic regime. The Outs can supplant the Ins only by violence and conspiracy. Hence we should not be particularly friendly with any of these governments. Any given country may suddenly explode and lose production. Or one may attack another.
Most important, the dominant cartel countries are fixing prices indirectly by the clumsy, uncontrollable device of restricting output. Iran provided the big opportunity in the winter of 1978-79. Various other OPEC countries raised production, but not enough to keep prices from rising substantially. Then on Jan. 20, 1979, and despite the agreement with this country, Saudi Ababia cut production from 10.5 million to 8 million barrels daily. Prices soared. In February, Saudi production went back up to 9.5 million. From April to June, it was down to 8.5 and finally back up to 9.5, still well below capacity. Along the way, the Saudis harshly criticized Iraq for producing too much and trying to cover it up.
The objective of manpulating output was and is a chronic deficit, to raise prices and keep them high. It is economic brinkmanship, because the prospect of lost supply panics refiners and consumers. Being unable to travel, work, heat a home, etc., can cost 100 times as much as any price, however high. Even a small probability of running dry sends buyers into a tizzy of overbidding and hoarding. Fear of a shortage quickly produces a shortage. Increased demand is immediately channeled into the thin spot markets, sending the spot prices way up.
In 1979, the cartel nations induced the shortage in order to send up spot prices, then raised official prices. They were only "following the market." Of course, they had first rigged the market by holding back output.
The danger of sudden shortages will remain. If consumers demand 30 million barrels daily, cartel nations may offcer only 29; or if consumers demand only 25 million barrels daily, they may be offered 24. The results are the same: consumer panic and surging prices.
Rising prices make the situation worse. The richer the oil exporters, the easier it is for them to cut back production.
In these circumstances, a stockpile has two purposes: to prevent panic by ensuring short-run supply despite the production cut, and to buy time in which to respond to the production cut.
A stockpile should be stretched out by rationing and taxes, to cut comsumption. If we had a six-month stockpile and a standby scheme to cut oil consumption only 10 percent, then if we lost even as much as 50 percnet of imports, several times the 1973 "embargo" loss, the stockpile could be stretched out over 15 months. If even a minor fraction of the scheduled stockpile had been ready in 1979, prices today would be much lower, and our position in the world much stronger.
The best operating rule for the stockpile should be: anyone can have all the oil he wants, paying a storage charge plus the highest price being paid in the world markets. Anyone who really fears damage by reason of death is protected. But nobody will have any incentive to hoard.
This rule will get us out of tight corners and keep everybody more or less uncomfortable but assured that no essential uses will go unmet. Even more important, the cartel nations will be less tmepted to push the panic buttoms.
The stockpile must be put in place as rapidly as possible. Without it, we will have one earthquake after another, of the 1978-80 type. But the initiative must come from Congress. The administration is too far committed to be "special relationship" with Saudi Arabia. Having lost the illusion that we had great influence in Iran, they cling all the more stubbornly to the remaining illusion of Saudi cooperation and stability.